What’s Your Portfolio Telling You?

There’s a lot of investment advice out there, but most of it is irrelevant for you, or any one investor. The problem is that every portfolio’s different, which means that relevant advice should be customized for a specific asset mix.

Here’s an example. Let’s say you stumble across an article that makes a persuasive case that Asian equity markets are set to fall. Even if you thought this is great advice, acting on the information, or not, depends on the structure of your portfolio. If your portfolio currently holds a below-average weight in Asian equities, it may be reasonable to do nothing.
The broader point is that the current structure of your asset allocation is second to none for deciding how to change, if at all, the investment mix. Outside advice can offer perspective, of course. Ditto for shifting market valuations and changes in your personal finances. But these variables rarely change dramatically in short periods, which means that generally you should look to your asset allocation for context on adjusting the portfolio. That’s typically the best place to start before considering additional advice.
Assuming you’ve developed a reasonable asset allocation strategy that matches your investment views, financial needs, etc., the portfolio will tell you when to consider changes. To take a simple example, if a 60%/40% stock/bond mix is the target, the more this allocation drifts away from the initial setting, the stronger the case to rebalance it back to 60%/40%. Or perhaps you have new information that inspires a different allocation target. In any case, your portfolio typically suggests what to do next in managing your investments.
Ah, but shouldn’t you sell when the “experts” yell “sell,” or buy when they scream “buy”? Maybe. If one or more markets suddenly crash, or surge in a short period, there’s a stronger case for letting Mr. Market influence your portfolio adjustments. But such drama is rare.
Meantime, if you have a high degree of confidence in a handful of seers, you can certainly follow their advice. But all the usual caveats apply, starting with the fact that almost no one dispenses consistently accurate forecasts. No wonder that a passive mix of all the major asset classes has a history of delivering competitive returns over time vs. the actively managed funds intent on generating superior results, as I discussed here, for instance. Keep in mind too, that generic investment advice can make for entertaining reading, but it’s not obvious that it applies to any one portfolio.
The easiest way to beat a broad benchmark is by building a portfolio that looks different. For instance, my proprietary index passively holds 13 asset classes, each weighted by their respective market values. As you start to drop some of these asset classes from your portfolio and/or change the allocations, you also change the expected return/risk profile. In other words, you can engineer a different performance result but mostly by embracing a different risk profile. And since return is generally linked with risk over time, we should be cautious in thinking that it’s easy to outsmart the market in risk-adjusted terms
That doesn’t mean we shouldn’t adjust our portfolios or change the asset allocation based on changing views. A simple and naïve rebalancing strategy has an encouraging history of boosting performance by around 50 to 100 basis points, all things equal, in a broadly diversified asset allocation strategy. Disciplined, talented investors can do even better. But at some point, higher return is a direct function of assuming higher risk, a shift that’s available to everyone. That may be a problem, however, if you’re not willing or able to endure materially higher levels of risk. There’s still no free lunch, no matter how much confidence you have about the forecast du jour.
In any case, it all comes back to your portfolio’s mix. The world is teeming with investment advice. Some of it may actually be useful. But before you do anything, analyze your portfolio and recognize how your asset allocation has changed. If it’s more or less where you want it to be, it may be reasonable to leave your portfolio as is, even if the seers are telling you that it’s time to act.